World economy is doing "better than feared, but worse than needed": IMF

Georgieva highlighted recent data indicating a softening US economy, but she noted that the feared recession has been avoided. She attributed the resilience of the US and other economies to more effective policies, an adaptable private sector, lower-than-expected import tariffs (at least for now), and supportive financial conditions.

“We’re seeing global growth decelerating only slightly this year and next. The world economy has generally withstood significant strains from various shocks,” Georgieva said, previewing the upcoming IMF World Economic Outlook report to be released next Tuesday at the IMF and World Bank annual meetings.

In July, the IMF raised its global growth forecast by 0.2 percentage points to 3.0% for 2025 and by 0.1 percentage point to 3.1% for 2026.

In an interview with Reuters, Georgieva noted that the updated outlook would reflect a small downward revision from the previous forecast of 3.2% growth in October 2024, though exact numbers were not provided. She emphasised that while the global economy is showing resilience, “exceptional uncertainty” and significant downside risks remain.

Georgieva stressed that the world economy is performing “better than feared, but worse than needed,” with global growth projected at roughly 3% over the medium term, well below the pre-pandemic forecast of 3.7%. “What you should focus on is the state of the market and the risks that could lead to larger problems,” she advised.

She also raised concerns about growing inequality, discontent, and hardship worldwide, citing risks such as a potential market bubble related to artificial intelligence. The IMF chief noted that uncertainty is rising, with increasing demand for gold, traditionally seen as a haven. On Wednesday, gold hit a record high of over US$4,000 per ounce amid the US government shutdown and expectations of a Fed rate cut.

Georgieva pointed out that the US tariff shock has been less severe than initially anticipated, with trade-weighted tariffs now around 17.5%, down from 23% in April. However, she warned that US tariffs are still subject to change, and inflation could rise if companies pass on higher costs or if a surge in goods previously destined for the US leads to tariff hikes elsewhere.

Valuations in financial markets are nearing levels seen during the dot-com boom of the late 1990s, Georgieva said. She cautioned that any abrupt shift in sentiment, similar to the dot-com crash, could have a global impact, particularly on developing countries.

“Buckle up,” she said. “Uncertainty is the new normal, and it’s here to stay.”

Georgieva’s Warning on Global Debt

Georgieva also urged countries to focus on sustainable growth by boosting private-sector productivity, controlling spending, reducing debt, and addressing current account imbalances to better prepare for future crises. She noted that these imbalances could trigger protectionist responses, which, when reflected in net capital flows, could fuel financial stability risks.

The IMF forecasted that global public debt will exceed 100% of GDP by 2029.

In her remarks, Georgieva emphasised the importance of competition, strong legal frameworks, financial sector oversight, and accountable institutions. She advised countries in Asia to deepen trade and undertake reforms to strengthen the service sector, which could lift GDP by 1.8% in the long term. In Sub-Saharan Africa, business-friendly reforms could boost GDP per capita by over 10%.

Georgieva also offered “tough love” advice to Europe, urging it to complete the single market to compete with the US private sector. For the US, which is on track to see record-high debt-to-GDP levels, she called for sustained action to reduce federal debt and boost household savings, especially through favourable retirement savings policies.

China was also advised to increase fiscal spending on social safety nets and clean up the property sector while reducing industrial policy spending, which accounts for 4.4% of GDP.

Reuters